Pearson - Always learning

All your resources for Economics

RSS icon Subscribe | Text size

Posts Tagged ‘first-mover advantage’

Sainsbury’s and Argos: Good or bad?

There has been a link between Sainsbury’s and Argos, with Sainsbury’s offering Argos concessions in some stores. But now, we’re looking at a much more significant link, with Sainsbury’s offering £1.3 billion for control of Home Retail Group’s Argos.

Many have questioned the sense of this offer, wondering what Sainsbury’s will gain from purchasing Argos, but Sainsbury’s has indicated it will boost sales, give itself access to a more advanced delivery network and Argos customers. Argos has worked hard to update its image, moving towards a more technology based catalogue and promising same day delivery in a bid to compete with companies, such as Amazon.

Online delivery is a costly business, with suggestions that retailers make losses on each delivery and hence pay customers to shop online. This move by Sainsbury’s may therefore be an investment in expanding its online delivery services and using the infrastructure that Argos already has. This will therefore help Sainsbury’s to invest in this sought after customer service, without having to invest millions into providing the infrastructure in the first place. This move may give Sainsbury’s a first mover advantage in the grocery sector, which may force other competitors to follow suit.

We could write for hours on the ins and outs of this potential deal and undoubtedly commentators will argue both for and against it. The following articles consider the good and bad sides and the future of grocery retailers in the UK.

Why does Sainsbury’s want to buy Argos? BBC News, Katie Hope (01/02/16)
Sainsbury’s agrees terms to buy Home Retail Group in £1.3bn deal The Guardian, Sean Farrell and Sarah Butler (02/02/16)
Sainsbury’s bets on Argos takeover for digital age Reuters, James Davey and Kate Holton (02/02/16)
Sainsbury’s returns with £1.3bn offer for Argos The Telegraph, Jon Yeomans and Ashley Armstrong (02/02/16)
Sainsbury’s could shut up to 200 Argos stores Sky News (12/01/16)
Sainsbury’s strikes deal to buy Home Retail Group Financial Times, Mark Vandevelde, Arash Massoudi and Josh Noble (02/02/16)

Questions

  1. What are the benefits to Sainsbury’s of taking over Argos?
  2. Why have many critics been surprised by this take-over?
  3. What is meant by a first mover advantage?
  4. Do you think that grocery retailers should diversify further or focus on their core business?
  5. Commentators suggest that delivery costs more to retailers than the price charged to consumers. Can you illustrate this using cost and revenue curves?
  6. Online delivery infrastructure is a big fixed cost for a firm. How will this change the shape of a firm’s cost curves and what impact will this have on profits following changes in market output?
  7. Do you think this take over will cause any concerns by competition authorities?
Share in top social networks!

How does the design of a penalty shoot-out influence the success of the teams involved?

The round robin group stage of the World Cup was recently completed with 16 out of the 32 countries eliminated from the competition – including England, Italy and Spain. The remaining 16 countries progressed to the single game elimination section of the tournament. At the time of writing, the first round of elimination games had been completed with the remaining 8 teams proceeding to the quarter finals of the tournament. Two of these 8 elimination games ended as a draw after extra time. The winner was decided by a penalty shoot-out e.g. Brazil and Costa Rica. Are these shoot-outs just a lottery or are there any factors that significantly influence their outcome?

The penalty shoot-out was first introduced in June 1970 and has become an important part of competitions such as the World Cup and European Championships for national teams and The Champions League, UEFA Cup and FA Cup for club teams. English fans have suffered more than most with victory in only one out of the seven penalty-shoot outs they have been involved in at major tournaments. On average only three out of every five penalties taken were scored. Germany has a very different record. They have won six out of the seven shoot-outs they have participated in and have a scoring rate of 93%. The Czech Republic has an even better record as their players have not missed a single penalty in the three shoot-outs they have been involved in – including beating West Germany in 1976.

Each individual penalty can be thought of as an example of an interdependent or game theoretic situation. The penalty taker (PT) has to choose from one of three different strategies: shoot to the right, shoot to the left or shoot down the middle. The success of the penalty does not just depend on which of these strategies is chosen. It also depends on the choice made by the goalkeeper (GK) i.e. dive to the left, dive to the right or stay where they are.

In the jargon of game theory there is strategic interdependence. It can also be thought of as an example of a simultaneous game. After the ball is struck it takes approximately 0.3 seconds until it hits the back of the net!! Therefore it is impossible for the GK to observe the shot and respond. Instead they simply have to guess which way they think the PT will kick the ball and respond accordingly. The same reasoning applies to the PT. They cannot observe which way the keeper will dive before they strike the ball. A penalty shoot-out is also an example of a zero sum game. If one teams scores they are better off by one goal while the other team is worse off by one goal.

There is also a sequential element to the shoot- outs as in each round one team always follows another. Is there either a first or second mover advantage? Is there any advantage from always shooting first or second? This was a question investigated by some economists who analysed the data from 129 shoot-outs in ten different tournaments taken between June 1970 and June 2003. This cut-off was chosen because up until this point it could be argued that a penalty shoot-out was an example of a truly randomized field experiment. The team that won the coin toss was required to shoot first. Teams were not given a choice of whether to shoot first or second until the rules were amended in June 2003.

The economists found that the teams who took the first shot won in 78 (60.5%) cases while the team that shot second won in only 51 cases (39.5%). This evidence suggests that there is a significant first mover advantage. One explanation for this finding is that there is greater psychological pressure on the PTs who go second in each round of the shoot-off and this has a significantly negative effect on their performance. The researchers also found that in 19 of the 20 shoot-outs they observed after June 2003 the team that won the toss decided to kick first. They concluded that not only is there a first mover advantage, but that teams/players are aware of it.

If there is currently a first mover advantage which provides teams with an unfair advantage then is there anything that the football authorities could do to help reduce the bias? One suggestion is to change the order in which the teams shoot in each round. A similar approach could be taken to that used in tennis in order to determine the order of the server in a tie break.

Imagine a penalty shoot-out between England and Germany. The sequence below provides one possible alternative to the current structure of the contest.

Penalty 1: Germany England
Penalty 2: England Germany
Penalty 3: England Germany
Penalty 4: Germany England
Penalty 5: England Germany
Penalty 6: Germany England

This would involve increasing the number of penalties from 5 to 6 so that both teams get to shoot first in three rounds of the contest. Interestingly the authors also found any first mover advantages fell dramatically if the shoot-outs reached the sudden death stage.

It will be interesting to see if first mover advantages occur in the remaining games in the tournament.

The English Disease – How to handle pressure: lessons from penalty shoot-outs The Economist (14/6/14)
Penalty kick shootouts and the importance of shooting first Soccermetrics Research (3/1/11)
Game Theory Lesson: Man Utd v Chelsea Penalty Shootout Econfix (11/3/14)
World Cup Game Theory – What economics tells us about penalty kicks Slate (24/6/06)
Football penalty shoot-outs are unfair says new research LSE (16/12/10).

Questions

  1. Explain the difference between a sequential and simultaneous game.
  2. Explain how either the penalty taker or goal keeper might attempt to transform the penalty from a simultaneous to a sequential game. (Hint: watch the next time the Brazilian footballer, Neymar, takes a penalty!!!
  3. Give some examples of potential first or second mover advantages in other industries.
  4. What other factors might influence the outcome of a penalty shoot? Is it possible for researchers to obtain any data in order to control for any of the factors you have identified?
  5. Explain the difference between a zero sum game and a non-zero sum game. Give some real world examples of a non-zero sum game.
Share in top social networks!

A new direction for an old retailer

When you think about John Lewis, you think of a large department store. It is a department store celebrating its 150th anniversary. Many large retailers, such as John Lewis, have expanded their product range throughout their history and have grown organically, moving into larger and more prominent locations. What’s the latest location? St Pancras station.

The idea of a click-and-collect store has grown in popularity over the past decade. With more and more people working and leading very busy lives, together with the growth of online shopping, it is the convenience of this type of purchase which has led to many retailers developing click-and-collect. Indeed, for John Lewis, 33% of its internet sales do come through click-and-collect. However, John Lewis is going a step further and its new strategy is reminiscent of companies like Tesco. If you just need to pop into Tesco to get some milk, you’re likely to go to the local Tesco express. The first mover advantage of Tesco in this market was vital.

John Lewis is unusual in that it is owned by its employees and this ownership structure has proved successful. Despite a long history, John Lewis has moved with the times and this latest strategy is further evidence of that. In today’s world, convenience is everything and that is one of the key reasons behind its new St Pancras convenience store. It will allow customers to purchase items and then collect them on their way to and from work – click-and-commute, but it will also provide customers with an easily accessible place to buy electronic equipment and a range of household goods. The retail director, Andrew Murphy said:

In the battleground of convenience, we are announcing a new way for commuters to shop with us … Customers spend a huge amount of time commuting, and our research shows that making life easier and shopping more convenient is their top priority.

This appears to be the first of many smaller convenience stores, enabling John Lewis to gain a presence in seemingly impossible places, given the normal size of such Department stores. For many people, commuting to and from work often involves waiting at transport hubs – one of the big downsides to not driving. So it seems sensible for such an established retailer to take advantage of commuters waiting for their train or plane to arrive, who have time to kill. The following articles consider this new direction for an old retailer.

John Lewis to open St Pancras convenience store BBC News (2/5/14)
John Lewis thinks small with convenience store The Guardian, Zoe Wood (2/5/14)
John Lewis to trial convenience store click-and-collect format at St Pancras Retail Week, Ben Cooper (2/5/14)
Why is click and collect proving so popular? BBC News, Phil Dorrell (2/5/14)
The rise of click and collect for online shoppers BBC News, Phil Dorrell (2/5/14)

Questions

  1. What are the advantages and disadvantages of the organisational and ownership structure of John Lewis?
  2. How would you classify this new strategy?
  3. How do you think this new strategy will benefit John Lewis in terms of its market share, revenue and profit?
  4. Is it likely that John Lewis will be able to target new customers with this new convenience store strategy?
  5. How important is a first-mover advantage when it comes to retail? Using game theory, can you create a game whereby there is clear first mover advantage to John Lewis?
Share in top social networks!

Can you vouch for these vouchers?

You’ve probably heard of Groupon. If you join its emailing list, the company will send you daily details of deals in your area that it has negotiated with local retailers. If you want to take advantage of any particular deal, you sign up for it online and if enough people do so to reach a minimum number agreed with the retailer, Groupon will bill your credit card. You then download the voucher and use it to purchase you discounted item or service. Discounts are often substantial – 50% or more.

But are these deals as good as they seem? On 2 December, the UK’s Advertising Standards Authority took the decision to refer Groupon UK to the Office of Fair Trading, following 48 breaches of the advertising code of practice in eleven months. It referred complaints about Groupon’s:

• Failure to conduct promotions fairly, such as not making clear significant terms and conditions
• Failure to provide evidence that offers are available
• Exaggeration of savings claims

And it was not just consumers who had complained. Many retailers found that so many people signed up for certain deals and the discounts were so great, with Groupon often charging the retailer half the discounted price, that retailers made substantial losses on the deals. One example was a cupcake maker, Rachel Brown, who runs the Need a Cake bakery in Reading, Berkshire. She had to bake so many extra cupcakes below cost that profits for the year were wiped out.

So what is the nature of this market failure and how appropriate are the competition authorities for dealing with it? The following webcasts and articles look at the issues. They also consider the growing problems Groupon faces in the market from new competitors.

It has not been good news recently for Groupon and it’s hardly surprising that, following Groupon’s flotation on the Nasdaq stock exchange in the USA last month, and an initial surge in the share price, its shares have since fallen by over 40%.

Webcasts
Groupon investigated by OFT Channel 4 News on YouTube, Benjamin Cohen (2/12/11)
Time to Jump Off Groupon Bandwagon? Newsy (24/11/11)

Articles
Groupon to be investigated by Office of Fair Trading Guardian, Mark Sweney (2/12/11)
OFT launches investigation into Groupon advertisements BBC News (2/12/11)
UK regulator launches Groupon probe Financial Times, Michael Stothard (2/12/11)
Groupon investigated by UK advertising authorities ZDNet, Eileen Brown (5/12/11)
Deal with it: Groupon ponders its future Independent, Stephen Foley (6/12/11)
Groupon’s Business Model Doomed To Fail Seeking Alpha, Mazen Abdallah (5/12/11)
Small Businesses Hate Groupon LiveOutLoud, Loral Langemeier

Competition authorities sites
ASA refers complaints about Groupon to OFT Advertising Standards Authority (2/12/11)
Investigation into the trading practices of MyCityDeal Limited (trading as Groupon UK) Office for Fair Trading (2/12/11)

Questions

  1. What market failings are there in the discount voucher market?
  2. What to retailers gain from dealing with companies such as Groupon?
  3. Do small businesses have anyone other than themselves to blame if they make a loss from doing a deal with Groupon?
  4. What should be the role of the competition authorities in the discount voucher market?
  5. Is Groupon’s business model ‘doomed to failure’ and if so why?
  6. Does Groupon have a ‘first-mover advantage’?
  7. Are there any barriers to entry of new firms into the discount voucher market? If so, what are they? What are the implications of your answer for the future of Groupon?
Share in top social networks!